Yves Smith of Naked Capitalism tees this one up beautifully:
This is truly unbelievable. Even as little as a week ago, the idea that AIG, the world's biggest insurer, would go begging the Fed for help would have seemed daft. But that's now an element of the meltdown in progress.
And AIG is a major credit default swaps writer, bigger than Bear. If Bear could not be allowed to fail, AIG certainly can't go asunder. But how can the Fed extend a lifeline to a party it doesn't regulate, or even have as a counterparty? The Primary Dealer Credit Facility was a clever move, but was not in place soon enough to save Beasr. This is even more of a stretch, and on an even more pressured timetable.
AIG May Seek Help From Federal Reserve, WSJ Says
By Hugh Son
Sept. 14 (Bloomberg) -- American International Group Inc., the insurer seeking to stave off credit downgrades, may seek help from the Federal Reserve, the Wall Street Journal said.
The insurer has turned down a private-equity investment because it would have meant turning over control of the company, the Journal said on its Web site, citing unnamed people familiar with the situation.
Chief Executive Officer Robert Willumstad, 63, is under pressure to raise capital after three quarterly losses totaling $18.5 billion and a 79 percent stock slide this year. Investors are concerned the New York-based insurer can't raise enough cash to cushion against future writedowns from credit-default swaps, which are contracts AIG sold to protect fixed-income investors.
A ratings cut may have ``a material adverse effect on AIG's liquidity'' and trigger more than $13 billion in collateral calls from debt investors who bought the swaps, the insurer said in an Aug. 6 filing. AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps that may cause $4.6 billion in payments, AIG said.
AIG spokesman Nicholas Ashooh didn't immediately return a phone call seeking comment.
September 15, 2008
Rush Is On to Prevent A.I.G. From Failing
By GRETCHEN MORGENSON and MARY WILLIAMS WALSH
NY Times
The American International Group, the insurance company, is planning a major reorganization and a sale of its aircraft leasing business and other units to stabilize its finances, a person briefed on the company’s strategy said on Sunday.
A.I.G. became one of the focuses at an emergency gathering of Wall Street executives over the weekend, and was trying to arrange a capital infusion in the face of possible credit downgrades.
It was unclear whether A.I.G. would succeed in its capital search, but a person briefed on the discussions said it was seeking more than $40 billion even as it tried to sell assets to shore up its financial footing. Among the businesses likely to be sold is A.I.G.’s aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet.
Investors, afraid that A.I.G. would have to absorb further write-downs in its already damaged mortgage securities and collateralized debt obligations, have driven down the company’s shares in recent days. The stock closed Friday at $12.14 a share, a decline of 46 percent for the week.
Several private equity firms were at A.I.G.’s headquarters in downtown Manhattan on Sunday, and may inject billions of dollars in capital into the firm, a person briefed on the matter said.
A.I.G.’s problems are not new. The company lost $13.2 billion in the first six months of 2008, largely owing to declining values in mortgage-related securities held in its investment portfolio and collateralized debt obligations it owns.
But the company’s outlook grew grimmer last week when Standard & Poor’s warned that it was considering downgrading the company’s debt as a result of further write-downs it might have to take....
